In Kentucky, may a lawyer take a percentage of an investment advisor's recurring management fee for referring a client to that advisor, even with the client's consent?

Plain-English summary

The opinion addressed an arrangement in which a lawyer would refer a client to an investment advisor in exchange for a percentage of the advisor's recurring management fees, based on the client's assets under management, even assuming full disclosure and the client's written consent. The Committee concluded the arrangement presented a serious conflict of interest and would likely make it impossible for the lawyer to disclose enough to support informed consent.

The Committee identified concerns under several rules: Rule 1.1 (competence), Rule 1.7(b) (representation that may be materially limited by the lawyer's own interests), Rule 1.8 (business transactions with the client), Rule 2.1 (professional independence), and Rule 5.4 (fee-sharing with nonlawyers). It reasoned that the prospect of continuing referral compensation, on top of the legal fee, is likely to interfere materially and continually with the lawyer's independent judgment about the client's best interests, and that the lawyer's affiliation could draw the lawyer into matters beyond the lawyer's competence and into investment-advisor registration requirements (citing KRS 292.330 and 808 KAR 10:260). The Committee tied its conclusion to KBA E-264, which had found a lawyer could not ethically take a percentage fee for referring clients to a bank's IRA program, observing that such payments, "whether they are called referral fees or commissions or even kickbacks," carry a presumption of being unethical even with disclosure and consent.

Currency note

This opinion was issued in 1996 and predates the Kentucky Supreme Court's substantial 2009 revisions to the Rules of Professional Conduct (SCR 3.130). The Kentucky Bar Association notes the rules are amended periodically and that lawyers should consult the current version before relying on this opinion. Treat this page as historical context, not current guidance. Verify against the current rules before relying on any specific rule, deadline, or requirement mentioned here.

Common questions

Q: Could a Kentucky lawyer take a cut of an investment advisor's fees for sending the advisor a client?

A: No. The Committee concluded a recurring referral fee tied to the client's assets under management created a serious conflict and implicated the bar on fee-sharing with nonlawyers.

Q: Did the client's consent make the arrangement acceptable?

A: Per the opinion, no. The Committee reasoned it would be difficult or impossible for the lawyer to disclose enough to make the client's consent adequately informed.

Q: What was the problem beyond the conflict?

A: The Committee noted the lawyer could be drawn into matters beyond the lawyer's competence (Rule 1.1) and into investment-advisor registration and examination requirements.

Background and rules framework

The opinion interprets KRPC 1.7(b) (conflicts from the lawyer's own interests; Model Rule 1.7) and KRPC 5.4 (fee-sharing with nonlawyers; Model Rule 5.4), together with KRPC 1.1 (competence), 1.8 (business transactions with a client), and 2.1 (independent professional judgment) (Model Rules 1.1, 1.8, 2.1). The analysis turns on the continuing financial interest the referral fee creates.

Citations and references

Rules of Professional Conduct:

• MR 1.7 / KRPC 1.7(b) (conflict from the lawyer's own interests)
• MR 1.8 / KRPC 1.8 (business transactions with a client)
• MR 5.4 / KRPC 5.4 (fee-sharing with nonlawyers)
• MR 2.1 / KRPC 2.1 (independent professional judgment)
• MR 1.1 / KRPC 1.1 (competence)

Statutes:

• KRS 292.330; 808 KAR 10:260 (investment-advisor registration and examination requirements)

Other opinions cited:

• KBA E-264 (1982): a lawyer may not take a percentage fee for referring clients to a bank's IRA program

See also

• KBA Ethics Op. E-428: Bar Referral Service Fees
• KBA Ethics Op. E-388: Advertising That the Lawyer Will Donate a Percentage of Fees to Client-Designated Charities

Source

• Landing page: https://kybar.org/For-Members/Rules-Ethics-Information/Ethics-Opinions
• Original PDF: https://kybar.org/Portals/0/Admin/Ethics%20Opinions/KBA_E-390.pdf

Original opinion text

Reproduced from the official source for research purposes. The linked source is authoritative.

KENTUCKY BAR ASSOCIATION
Ethics Opinion KBA E-390
Issued: July 1996

The Rules of Professional Conduct are amended periodically. Lawyers should consult
the current version of the rules and comments, SCR 3.130 (available at
http://www.kybar.org), before relying on this opinion.

Question:

May a lawyer, after disclosure to and consent by the client, receive compensation,
structures as a percentage share of a recurring account management fee, for the
lawyer’s referral of the client to an investment advisor?

Answer:

No.

References:

KRPC Rule 1.1, 1.7, 1.8, 2.1 and 5.4; KBA E-264 (1982)
OPINION

A questions has been raised whether a lawyer may ethically affiliate with an investment
advisor in an arrangement whereby the lawyer refers the client to the investment advisor in
exchange for a percentage share of the investment advisor’s recurring management fees (based
on the amount of client’s assets under management), even assuming arguendo, the lawyer has
fully disclosed the referral fee arrangement and has obtained the client’s written consent. In the
opinion of the Committee, this arrangement presents a serious conflict of interest and is likely to
involve circumstances where it is impossible for the lawyer to make sufficient disclosure to
properly inform the client’s consent.
The referral fee arrangement raises concerns under a number of KBA Rules, including,
among others, Rules 1.1 (requirement of competent counsel), 1.7(b) (prohibition of
representation that may be materially limited by the lawyer’s own interests), 1.8 (prohibition of
business transactions with the client), 2.1 (requirement of professional independence) and 5.4
(prohibition of fee-sharing with non-lawyers). The prospect of the lawyer’s referral
compensation, supplementary to the legal fee already being paid by the client, is likely to
interfere materially, on a continual basis, with the lawyer’s independent professional judgment in
objectively considering the client’s best interests. Moreover, in many instances the lawyer’s
affiliation with the investment advisor and the resultant client referrals could involve the lawyer
in matters beyond his professional competence, and, indeed, raises difficult questions regarding
state and federal investment advisor registration and examination requirements. See, e.g., KRS
292.330; 808 KAR 10:260. Consequently, it would be difficult, if not impossible, for the lawyer
to disclose fully and fairly to the client the consequences of pursuing the recommended course
instead of other alternatives that the lawyer is unlikely to have evaluated or considered. These
issues obviously become even more troublesome in the common situation where the client
requests advice in the investment of funds obtained during the representation, funds which in

many instances constitute the bulk of the client’s personal assets. Should the client suffer the
loss of these assets, the lawyer will be challenged to explain satisfactorily that his advice was
based on his independent professional judgment and was not in any sense clouded by his own
pecuniary interest in the management of the client’s assets by the particular investment advisor to
whom he referred the client.
In conclusion, reference should be made to KBA E-264, which states that a lawyer could
not ethically participate in an arrangement in which the lawyer would refer clients to a bank in
exchange for a percentage fee based on the amount of deposited by those clients in banksponsored Individual Retirement Accounts. The opinion provides, “whether they are called
referral fees or commissions or even kickbacks, they have one common characteristic, they are
payments to an attorney for allowing that person or organization to make a profit from his client”
and “attorneys are cautioned that a presumption exists that such referral fees are, even with full
disclosure to the client and with his consent, unethical because they lend themselves to the
appearance of impropriety.”

Note to Reader
This ethics opinion has been formally adopted by the Board of Governors of the Kentucky
Bar Association under the provisions of Kentucky Supreme Court Rule 3.530 (or its predecessor
rule). The Rule provides that formal opinions are advisory only.